There have been a few articles posted lately that reflect some major maladies in the Canadian mutual fund industry. According to a recent Morningstar report, Canadian mutual funds have the highest fees amongst 25 countries covered in the report, coming in at an average of 2.35 per cent. Some recent studies have highlighted the fact that what you pay for isn’t always what you get. A summary of two articles is below, as well as some changes that will help investors see what costs they are paying.
A recent study conducted at York University concluded the following:
- Funds with trailer fees (annual service commission paid by a mutual fund company to a sales representative) attract higher inflows as mutual fund sales representatives are incented to sell them.
- In general, funds with trailers perform worse than those without.
- In addition, funds sold through dealers affiliated with the mutual fund company perform worse than those primarily sold through independent advisors.
Funds sold through independent advisors, without trailers have to perform much better to get noticed. Not only are performance incentives higher for funds without trailers, but since fees are taken directly from the bottom line, they directly claw into performance.
Active money managers – those who select securities rather than passively follow an index – generally underperform their benchmarks after fees have been accounted for. Only 23 per cent of actively managed Canadian equity funds have outperformed the S&P/TSX Composite over the past five years, and it’s the same story for international funds.
When it comes to efficient markets like the TSX, it becomes much harder to have a leg up on anyone and outperform the general index. In most cases, even if the manager does outperform, it is not by a significant enough margin to overcome the cost of the fees embedded in the management of the funds themselves.
Keep the Lights On!
Costs are one of the most overlooked and underestimated impacts on performance. Many of the actively managed mutual funds, wherein fund managers seek to outperform a benchmark (typically a well-known market index or a combination thereof), fall behind when costs are accounted for. Whether it’s a trading cost or a fee imposed on your holdings, a key consideration for your investments is to be smart about where your costs are coming from and how much you are paying. Fortunately, there is a new regulation (CRM2) coming out next year, which will address some of these issues and make it easy for investors to understand the impact of costs on their portfolios as firms will have to present the full dollar cost of trading and trailer fees embedded in your holdings.
Not only do fees affect your bottom line, but they can affect the judgement of your advisor. There is a measurable value to independent advice, in that the advisor’s goals are more aligned with your own. Choose an advisor whose opinion you trust, and who is taking the right steps to ensure you are invested in well managed funds that do not have trailer fees embedded in them.
Invisor offers Canadian investors personalized investment management solutions at a fraction of the cost of traditional advisor models, without requiring any minimum investment amounts. You can estimate your total cost savings and its impact to your portfolio by investing with us.